Greening the Eurosystem Collateral Framework

The collateral framework of the Eurosystem is a crucial component of the eurozone financial system, since it determines the way by which commercial banks obtain central bank liquidity and affects the credit conditions facing the non-financial sector. However, in its existing form, it does not capture climate risks and is not conducive to the decarbonisation of EU economies. Our analysis shows that carbon-intensive sectors are overrepresented in the list of eligible corporate bonds: 59% of the eligible bonds have been issued by carbon-intensive sectors, while the contribution of these sectors to the EU gross value added and employment are 29% and 24%, respectively.

We investigate how the Eurosystem collateral framework can become climate-aligned using two different approaches. In the first, ‘climate footprint’ approach, haircuts and bond eligibility are adjusted based on the climate impact of bond issuers, which in our analysis is captured by using both backward-looking and forward-looking metrics. The second, ‘climate risk’ approach, relies on the use of the NGFS climate scenarios for estimating the financial effects of climate risks on bond issuers. For both approaches we explore several policy options and show the implications for the haircuts per sector, the haircut-adjusted outstanding amount of bonds and the weighted average carbon intensity of the list of eligible bonds. We also analyse the channels via which a climate-aligned collateral framework can affect the climate performance of companies. We show that the ‘climate footprint’ approach can be more conducive to decarbonisation compared to the ‘climate risk’ approach, without reducing the amount of corporate bonds that euro area banks can post as collateral.